Occasional wine-geeky and wine-wonky postings from some guy making the stuff in the Sonoma Valley. I also write about other things that interest me.

Discount Sites’ Value To Small Wineries

F**k Discounts

No I really mean it: f**k ’em. Much as I don’t like to start a post on a negative, I’m just so done with discounting. No, we are not going to haggle on the price of that bottle of Pinot—I will sell it to you at a discount if (and only if) you join the wine club and accept at least one shipment before you cancel. No, you can’t have a free tasting unless you make a $50 purchase (update: no free tasting, period). I’m already selling into wholesale at FOB pricing, so no I will not cut another 20% off—and yes, I know you are trying to sell in a market where every SWS rep is giving away three cases to sell one. OK, I will negotiate on the 3-case minimum drop to get by-the-glass pricing, but no, you can’t have it at the BTG price unless you are actually pouring it by the glass. And on, and on

Thankfully, it looks like the market is starting to come to me—at the retail level anyway people are increasingly accepting of front-line pricing. I have even been able to roll back some of the price cuts we had to take just to stay in business when the Great Recession hit.

We’re not out of the woods yet, and if the stories I hear from friends are any indication the Recession may have spawned a new and persistent consumer demographic who simply won’t purchase anything unless they think they are getting a “deal.” Not that long ago I overheard a group outside the shoe store next to our shop, commenting on the “SALE” sign in the door: “Are they kidding? 10% off? I won’t even walk in unless they are selling at least at 50% off.” Ugh. Thank you for not coming into my store, either.

“But Wines Are SO Expensive! Why Won’t You Sell To Me At A Discount?”

This morning Ryan O’Connell posted on “What Is A Wine Really Worth?” where he points out different scenarios on wine pricing from the producer’s perspective. He says:

I belong to the supply-based school that says you take the cost of making wine and add a bit. you add up the cost of viticulture (or grapes if you’re sourcing fruit), the cost of vinification, the cost of elevage/aging, the cost of bottling, the cost of shipping, the cost of storage, the excise and local taxes, and the cost of marketing/selling, and then add a bit for each person in the chain of custody that brings the wine to the consumer.

Our pricing model is a little more complicated, but not rocket-science-complex. First I lay out what percentage of product I believe I can sell direct-to-consumer (DTC) at full retail and at discounted retail (wine club and case discounts), and to selected retailers at wholesale. (Note that I entirely leave out selling at FOB into distribution—these days the entire middle tier is so dysfunctional when it comes to small wineries that there is no point courting distributors. It’s a waste of my resources for the return distribution offers.) Then I look at our burn rate: cost of goods and overhead costs: salaries, marketing, rents and other expenses, taxes, debt service, etc. Then I figure out how many cases I have to sell in each category across our mix of price points to cover our burn rate. That is my sales bogey. Clearly the more I can move at DTC (and loyalty-discounted DTC) the fewer cases I have to sell to hit that bogey—and the more likely it will be that there will be a bit of profit to pass through to myself and to my investor partners.

Back in the day I worked for an ex-fighter pilot. During a discussion of our enterprise-wide crop forecasts he said: “In bombardier school, they taught us to ‘measure it with a micrometer, lay it out with a ruler, and hit it with a sledgehammer.'” To a degree that is how our pricing/sales model works; being a small, single-vineyard operation we are more at the mercy of the whims and vagaries of nature than bigger wineries. Regardless, we need to hold the line on the pricing we have set because that it what we have to make to stay in business. Top line to bottom line, discount pricing makes it that much harder to keep the doors open.

“Then Why Do I See Your Wines On Discount Sites?”

A month or so ago I had a wine club member in the shop. As we were wrapping up our transaction he stepped into my office and whispered: “Is everything going OK? I saw one of your wines on a discount site and wondered if you were having money troubles.” No more than usual, I assured him. I went on to discuss with him how we move a tiny fraction of our wine through these outlets, and given the discount pricing (essentially around FOB) these sales represent an even smaller fraction of our revenue. “Then why do you do it?”

In a word, marketing. Every one of us producers of ultra-premium wine caters to a tiny slice of the incredibly long tail of the wine consumer demographic distribution. Consciously or not, in order to grow our sales (or even to maintain them flat) we rely on a continuous trickle of new buyers who decide to trade up from entry-level wines. We have thanked the large industrial producers and gateway wines like White Zin and Moscato for introducing people to wine, and prayed that enough of these casual consumers would “get the bug” and trade up to keep us in business.

This modality is still in play. But the discount sites offer small producers a more targeted approach. No doubt the majority of buyers on these sites are there for the deal; maybe they are even part of the persistent new demographic I mentioned above. The difference from the gateway wine approach is that this demo has already traded up to a degree, and they are being contacted directly by the discount sellers. And a few of these buyers are going to taste the wines we feature, get excited, and trade up further—perhaps even to the extent of looking specifically for my brand—ready to pay retail. This is way more powerful than just praying that the random entry level graduate is going to stumble across my brand.

Every Bottle Moved Through Discount Sites Represents a Direct Appeal To The New Buyer

Every dollar lost relative to the retail price of that bottle is a dollar spent on marketing, and arguably a far more effective marketing dollar than one spent on print ads or medal competitions. We are leveraging the huge mailing lists of the discounters—renting their list for a day or two, for what amounts to a tiny fraction of what it would cost to buy a mailing list—and we incur no hit with the potential new customer for filling their inbox with ads. The discounters take that hit for us.

The downside is the certainty that some consumers are going to think that because we are placing wines on a discount site we are having financial difficulty. I’m putting up this post to address that mis-perception. We are not. We are hoping to reach new and potentially loyal customers.

I’m also putting up this post to let my readers know that tomorrow, Saturday March 17th, 2012, my friends at The Wine Spies are going to feature our 2004 Los Carneros Library Selection Pinot Noir. Today in our Salon we are pouring one of our 2003 Pinots. People are loving it, and spending $58/bottle for it. I won’t be pouring the 2004 Carneros as a Library Selection in the Tasting Salon until some time next year. Tomorrow only you can buy it from the Spies for something like $40. So stock up. And after you fall in love with it, come visit us in Sonoma. Or at least check out the website.

About John M. Kelly

Trained as a biochemist, I have been professionally active in the wine industry since 1986. I started as the Westwood Winery winemaker and general manager in 1994, and became an owner/partner of the Annadel Estate Vineyard in 1998.

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5 thoughts on “Discount Sites’ Value To Small Wineries”

We get the same thing on the retail end. If we run a red tag sale everyone worries, (which is kinda sweet when you think about it) that we are having financial problems and while nowhere near livin’ large, we are doing okay, we slash prices on certain items to free up some dead cash, create some excitement and urgency, (get it before they are gone!) and basically get people in the door. Once they are there the likelihood of our selling at least one more thing is high….that and we create a relationship that we hope will translate into future sales.

As a small retailer we can’t compete with the BevMos and Total Wines of the world. We can’t afford full page adds or commercials, what we have is our highly wine educated staff, the fact that we are committed to your return business and the personal relationships that form when you shop at a independent retailer. Well that and much cooler wines that those behemoth chains can’t stock because there just aint enough cases made. Problem for us, always, is getting people in that front door….sometimes only a red tag sale can do that.

My sympathies regarding the bombardment of discount sales everywhere. It’s an uphill battle to face. Your explanation of your marketing strategy is very clear though. So your worried fans need not be concerned with your finances, as you stated.

Indeed, for small producers, employment of flash sale distribution has little to do with making profits and everything to do with long-term spreading-the-word to new prospects.

Sam’s right—sometimes you need a sale to get new customers through the door. The question is whether or not they come back when the sale is over. The metrics are pretty weak; they look about the same as for an email campaign—conversion of about 1%. But her point about knowledgeable and personalized service is spot-on. Because of our unique approach to face-to-face relationship building, conversion to a sale at full retail is over 80%, and to a wine club signup is nearly 20%.

Marcia’s observation about spreading the word oversimplifies things a bit. There are occasions where a volume discount sale makes business sense to bring in a slug of cash, or to clear some floor space in the warehouse.

My personal relationships with the operators of these sites factor in to my desire to work with them as well. I genuinely like working with Jason Seeber at Wine Spies, and with Tony and Danielle Westfall at inVino. I stopped working with Lot18 after Ron Washam left. Aside from Ron’s departure, Lot18 never takes possession of the product but has decided they can dictate how I handle order fulfillment—not OK with me, and the “value” they offer is not worth the annoyances.

Highly knowledgeable sales staff have, more than once, kept me from canceling a wine club membership by their exemplary service! (Ditto for superior service in a retail wine shop. I’ll return time and again to work with shop staff that knows my preferences. It’s a no-brainer.)

I run a small beer & wine shop with about 400 wines, mostly limited production boutique stuff from all over. I used to sell an excellent book of limited production French wines. In a nutshell, deep discounting is not part of my world. These producers and importers simply do not have the ability to do much, if any, discounting. I can’t do much discounting. The other day my favorite vendor brought a Rhône wine maker to the store. The wines are great and I immediately placed a small order. I mentioned to the winemaker that I would have to put some extra effort into selling the wines because they are a little expensive, but well worth it (they will be priced around $30 per bottle, not a big deal). The poor guy thought I was trying to beat him down on the price, so he apologetically told me that he could not negotiate. I was a little embarrassed and tried to make sure that he knew I was not trying to beat his price down, I was simply trying to say that these are great wines, I am behind them, I will sell them, but my customers generally spend less than $20 per bottle. Anything over that might take some coaxing. In a nutshell, discounting just does not work for small producers, small importers/distributors and small stores. We compete on superior service and superior selection.